Good prospects for UK recruitment recovery

Recruitment
markets in 2004 have experienced a much better start to the year than at any
time since 2000.

This
time last year, there was global uncertainty surrounding the build up to the
war in Iraq and in 2002, the world economy was still dealing with the aftermath
of September 11 the year before. Prior to that, in 2001, the US economy was
showing signs of great vulnerability amid well-founded fears of a global
slowdown.

But
a spirit of optimism prevails for 2004, with almost all observers expecting
growth in the recruitment markets to return following three years of decline.

The
key driver of the recruitment markets is economic growth.

The
UK economy grew by 2.5 per cent in the fourth quarter of 2003, just above the
long-term average growth rate of 2.3 per cent. Whenever the economy grows above
its long-term growth rate, recruitment markets tend to grow as well; if it
falls below this rate, then recruitment markets will follow suit.

Of
course, the recovery of the UK economy is not certain. Much will depend on what
happens to the global economy. And while most regions are experiencing a strong
revival, continental Europe is still suffering from low growth.

The
UK recovery will also be influenced by domestic policy considerations, as UK
authorities are pursuing a much tighter monetary policy than the US or Europe.

As
a consequence of this policy, the UK now has, and will continue to have, much
higher interest rates than the US and the rest of Europe throughout 2004. This
should mean lower inflation in the longer term, but will also mean a stronger
pound and a weaker manufacturing sector than would have otherwise been the
case.

A
key indicator to watch in the coming months will be research into business
confidence. Companies have displayed a marked lack of willingness to invest
over the past few years, and the recovery will not take hold unless companies
begin to invest again in the future. There are signs that confidence is
returning to the business sector, but more is needed before we can be certain
that 2004 will mark a turning point in the recruitment markets.

On
balance, however, the prospects for a strong recovery in 2004 look good. Much
more problematic is the outlook for 2005 and beyond.

There
are two major risks to the recovery after 2004.

The
first is the implosion of the US economy, which would cause a major downturn in
the global economy.

The
US budget deficit is expected to reach a record $500bn in 2004. In subsequent
years, spending on social security and healthcare will absorb a growing
proportion of GDP, from around 8 per cent of GDP in 2004, to more than 14 per
cent in 2030. The fear is that the Federal Reserve Bank in the US has kept
interest rates too low for too long in its desire to see the firm recovery of
the US economy. The likelihood is that it will soon have to put interest rates
up, although rising rates in an election year could prove politically
embarrassing.

The
second key risk for the UK economy in the longer-term, is that of the hole in
public finances growing so much that the chancellor has to cut public spending,
reversing the current public spending plans.

This
would have a big impact on public sector recruitment markets.

But
the risks to the recovery in recruitment markets are generally modest and far
off. We expect recruitment markets to grow by between 5-10% in 2004, with the
prospect of further growth in 2005.